Behavioral economics tips for home sellers: How to price a house
Anchoring is one of the most common human biases. As an example (from Nudge), write down your phone number and add two hundred. Now answer when you think the Hun sacked Europe? In surveys, people’s answers differ by a few hundred years depending on whether they have a low or a high anchor.
Marketers have long been curious about how different prices affect customers’ ideas of a product’s value. In the February issue of Psychological Science, marketing professor Chris Janiszewski and research assistant Dan Uy of the University of Florida tackled the age old question of whether people are really fooled – or at least subconsciously nudged – by a price tag than ends with quirky .95 instead of a nice, round, even .00.
For the paper (which is unfortunately subscriber-only), they put together a laboratory experiment involving three groups of potential buyers and a plasma television. Each buyer was told one of three retail prices: 1) $4,988; 2) $5,000; 3) $5,012. Janiszewski and Uy then asked the buyers to estimate the television’s wholesale price. Those with the round $5,000 retail price tag consistently guessed a lower wholesale price than those with the quirky retail prices. In other words, the quirky price anchor was stickier than the round price anchor. People stayed closer to it. (People who started with the $5,000 retail price were also more likely to guess the wholesale price was a round number.)
The authors argue that this result is the effect of anchoring on small increments (like $1) versus larger ones (like $100). Similarly, someone anchored on a price of $29.95 will be more likely to think in terms of coins than one anchored on a price of $30. As a result, they will name a wholesale price closer to $29.95.
Moving into the real world of real estate, Janiszewski and Uy collected five years of home sales in Alachua County, Florida, and compared the list prices and actual sale prices of homes, which fell between $600 and $2 million. Controlling for home price and excluding homes with $1 or $10 price endings (which usually mean foreclosures), they found that sellers who listed their homes more precisely walked away with a final amount closer to their asking price. People who listed homes with hundred dollar endings got closer offers than those who listed homes with thousand dollar endings, who got closer offers than those with ten thousand dollar endings. The precise price seemed to impose an arbitrarily higher floor on the negotiation process.
A final important caveat: the authors excluded homes that sold at or above the listing price, saying that these sales reflected a “bidding war,” which is not a common feature of most routine durable consumer good purchases. Unfortunately, the exemption dropped about half the listings in the sample. It’s not clear whether home price anchoring has a symmetrical or asymmetrical effect. Do precisely priced homes fluctuate between a narrower range – low and high – than imprecisely priced homes. For the moment, Janiszewski and Uy’s study cannot say.